Answer-first summary for fast verification
Answer: increase.
## Explanation To determine the effect on EPS, we need to compare the after-tax cost of debt with the earnings yield: **Earnings yield** = EPS / Price per share = $3 / $40 = 7.5% **After-tax cost of debt** = 7% Since the earnings yield (7.5%) is greater than the after-tax cost of debt (7%), the share repurchase will be **EPS accretive**. **Calculation logic**: - The company is borrowing at 7% to buy back shares that are earning 7.5% - This creates positive financial leverage - The interest expense is less than the earnings being eliminated - Therefore, EPS will increase **Key concept**: When earnings yield > after-tax cost of debt, share repurchases are EPS accretive.
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
No comments yet.
An analyst gathers the following information about a company that plans to issue new debt to repurchase shares:
$3$40As a result of the share repurchase, the company's EPS will:
A
decrease.
B
not change.
C
increase.